TWST: What do you include in your universe at this point?

Mr. Fox: Right now I cover the commercial real estate services space, including CB Richard Ellis (CBG), Jones Lang LaSalle (JLL), and Grubb & Ellis (GBE). I also cover a wide range of business and professional services names, including uniform rental companies like Cintas (CTAS), G&K Services (GKSR), and UniFirst (UNF); staffing companies like Robert Half (RHI), Kelly Services (KELYA), Manpower (MAN), Spherion (SFN), and Resources Connection (RECN); and then also a couple of other business services names like American Reprographics (ARP), CRA International (CRAI), Jackson Hewitt (JTX), and Schawk (SGK).

TWST: A broad array of services companies.

Mr. Fox: Yes.

TWST: Let's start with the commercial real estate side. How has business unfolded so far this year relative to expectations?

Mr. Fox: In the first half of the year, I think the business environment, especially the investment sales environment, was much stronger than investors were originally anticipating, partially because of the Blackstone-EOP deal, partially because of continued money flowing into the space and somewhat easy credit standards. Beginning at the end of July, we've seen the credit markets really change and subsequently, underwriting standards have increased and the risk premium has returned to the asset class. As a result, we've seen the cost of debt increase and highly leveraged buyers are out of the market. In addition, prices on B and C properties have declined as much as 15%. The change in the underwriting standards has had a meaningful impact on highly levered buyers of commercial real estate because their high dependence on debt financing, i.e., 80%, 90% plus loan to values, interest-only type loan packages that are not available in the current marketplace. However, we've seen well- capitalized buyers continue to purchase commercial real estate, but we are definitely seeing a softening in the investment sales market currently compared with the first half of 2007, and we expect transaction volume to remain relatively low in the near term, as market participants try to figure out where the market is headed. However, we think the debt market will stabilize and that transaction volumes should continue to increase over the long term as the commercial real estate market becomes more institutionalized.

TWST: This softening because of, as you say, financial considerations, not so much market considerations, what has it done to pricing in the space?

Mr. Fox: I don't think the change in the credit markets has had any impact on pricing, as far as what the commercial real estate services companies are charging, and we wouldn't expect it to have an impact. However, on the competitive front, I think, local and regional type companies are probably going to have more difficulty in a softening environment than large, global diversified companies like CB Richard Ellis or Jones Lang LaSalle.

TWST: What's going on in this marketplace? We've seen some consolidation. Is there more to come?

Mr. Fox: Yes, despite recent consolidation, the industry remains highly fragmented. There are two or three players that have a global presence and a well-diversified product offering. I think that you'll continue to see CB Richard Ellis and Jones Lang LaSalle consolidate the space. I think that we are likely to end up at some point down the road with a small number of global, full service providers and a large number of very local, specialized firms, but a lot of the mid-sized firms will continue to be acquired. I think CB Richard Ellis has demonstrated its ability to identify and integrate both small and very large acquisitions, while Jones Lang LaSalle has continued to acquire small and medium-sized companies that enhance its platform.

TWST: Is that because that's what clients want? Is that global reach?

Mr. Fox: I think so. When you look at large investors and large corporations, there is definitely a desire to consolidate the number of service providers they are using and to the extent service providers can offer more services in more locations, it bodes well for both the client and the service provider.

TWST: As you look at the real estate market, the commercial side of it seems to be reasonably good despite what's going on in the consumer economy. Is that accurate?

Mr. Fox: Yes, I think that's still accurate. I think the main reason for that is that the leasing market is still relatively strong. Vacancy rates continue to decline and rental rates are continuing to increase. In addition, the outlook for supply growth is pretty rational compared to similar environments in the past, when you saw more construction at this point in the cycle. I think one reason you haven't seen as much construction is that it has been difficult to get financing for speculative projects without tenants. In addition, it seems that corporations have remained pretty conservative and really haven't built until they actually needed the space. I think the key to the leasing market is employment growth. If we see a softening in employment, I think we are likely to see a softening in the leasing market, but if employment remains solid, strong fundamentals could allow the commercial real estate market to get through the tough credit market.

TWST: But we haven't seen that softening yet.

Mr. Fox: Employment has been somewhat softer, but we are still seeing pretty solid growth. The next few months should prove important.

TWST: We should stay tuned.

Mr. Fox: Exactly.

TWST: You say, longer term, you remain optimistic. Why? What's out there? Aren't corporations trying to reduce the amount of space they have?

Mr. Fox: Corporations are definitely trying to reduce costs and I think they can outsource a lot of their real estate management to companies like Jones Lang LaSalle and CB Richard Ellis, which should lower their costs. I think corporations would love to have less space, but as companies grow, they usually need more employees and inevitably more space. I think a realistic approach is to outsource more real estate functions, which should allow corporations to focus on their core competencies. Likewise, when you look at Jones Lang LaSalle and CB Richard Ellis, one of their core competencies is to manage real estate. In addition, I think the investment sales market is in the early stages of being institutionalized. When you compare the commercial real estate market to the stock market or the bond market, you can really see that that process is in its infancy. In the near term, there are obviously some concerns with what's going on in the credit market, but longer term, institutions should continue to own more real estate. Investment management is growing rapidly in commercial real estate, and when you look at the way funds are being structured with finite lives of around three to five years, holding periods for the asset class should decline. That trend should lead to more transactions over time.

TWST: Is that trend toward institutionalization being slowed by what's gone on in the credit markets?

Mr. Fox: Not really, we continue to see capital being raised from institutions and the environment for raising capital is still quite robust. However, the current environment could likely slow the deployment of the capital that has been raised.

TWST: There is just a little foot-dragging going on.

Mr. Fox: In the near term.

TWST: We touched on consolidation here. Do the bigger guys, the two big players, have the balance sheets to support continued consolidation?

Mr. Fox: CB Richard Ellis' strategy has been to use leverage to make large acquisitions. Then it pays down the debt pretty rapidly, as its business model yields a lot of free cash flow. The last large acquisition it made, Trammell Crow, was in December 2006 and it is currently paying off that debt. I think if there is an opportunity, it will definitely make more large acquisitions. As far as making small add-on acquisitions, I think CB Richard Ellis has the balance sheet and the free cash flow to continue to do that in the near term, as well as longer term. Jones Lang LaSalle's bread and butter acquisitions have been mid- sized regional type companies, as it focuses very much on finding companies with a similar culture that complements its platform. Jones Lang LaSalle prefers to buy private companies and is not necessarily focused on wringing out costs.

TWST: They are really different approaches.

Mr. Fox: Yes, definitely.

TWST: Are there sizable companies out there still to be acquired or is it going to be smaller, piecemeal acquisitions from here on in?

Mr. Fox: I think we will continue to see a lot of smaller acquisitions and to the extent that large acquisitions become available, CB Richard Ellis would be the likely acquirer. There are still a handful of medium-sized companies in Europe that can be acquired.

TWST: We've done the easy stuff at this point.

Mr. Fox: For the most part.

TWST: As you talk with investors, what kind of interest are you finding in these names?

Mr. Fox: There's extremely high interest in the stocks. Currently investors are trying to decide where we are in the cycle and if we are having a slowdown followed by a resurgence or if the US and global economies are going to fall into a deeper slowdown. However, most investors that are looking at the names have a pretty positive long-term view of the industry.

TWST: What are they looking for in the way of a trigger to do something in this space?

Mr. Fox: In the near term, investors are just looking for clarity on where the markets are headed and where the economy is going. Longer term, I think investors remain comfortable that the two large companies, CB Richard Ellis and Jones Lang LaSalle, will continue to gain market share, grow revenues and expand margins, as they continue to leverage their platforms.

TWST: What are you telling investors to do with those names at this point?

Mr. Fox: We are overweight both CB Richard Ellis and Jones Lang LaSalle and they remain our top picks in our universe. Long term, we are very positive on the stocks and we think that looking out 12 to 24 months, especially if we avoid a recession, the levels at which the stocks have traded recently will likely prove to be a pretty good buying opportunity.

TWST: Give us a quick overview of why you like CB Richard Ellis. What's the story? Where are their growth opportunities?

Mr. Fox: CB Richard Ellis has built a well-diversified platform largely from the brokerage business and about two-thirds of its revenues or slightly more than that come from the Americas. I think the biggest opportunities for the company are in Europe and Asia, where it has very strong footprints and it should continue to gain market share. The other major opportunity is growing its global outsourcing business that it bolstered with the Trammell Crow acquisition. It now has relationships with 85% of the Fortune 100. This is a great opportunity because Trammell Crow built those relationships in the United States and now with the global platform of the combined company, these relationships can grow on a global basis. That's going to be a tremendous revenue growth opportunity over the next few years. In addition, the revenue from outsourcing is much more stable than the transactions business. It's the type of business that once you win it, you usually have it for a long time and it's not cyclical. It also leads to a lot of transactions business.

TWST: It just increases the stability.

Mr. Fox: Exactly.

TWST: The other name in the space was Jones Lang LaSalle.

Mr. Fox: Jones Lang LaSalle is currently more diversified and it has more international exposure than CB Richard Ellis, although it's a much smaller company. I think Jones Lang LaSalle should continue to gain market share around the world. It also has an opportunity to really expand its margins. It has invested in its platform over the past couple years and over the next few years it should begin to reap some of the benefits of its investments.

TWST: As you look at these two companies, is there any real competition? Are they really the undisputed leaders in the space at this point?

Mr. Fox: They are definitely the leaders in the space, but it's a very competitive market. When you look at the market on a global basis, these guys really stand out, but in every local market they have strong local or regional competition. They are also competing against self-providers.

TWST: Are we likely to see more competition or is it being taken out of the picture because these guys have gotten so dominant?

Mr. Fox: I think over time the space is definitely going to consolidate further, but it's still very fragmented. However, on the global outsourcing side of the business, there are really only two companies that large multinational corporations can go to if they want to consolidate service providers.

TWST: They've got a size advantage that is hard to overcome.

Mr. Fox: Exactly.

TWST: What's the risk in this space? What can go wrong other than a global economic downturn?

Mr. Fox: Obviously the biggest risk is a global economic downturn. While there is always execution risk, both companies have proven over the last few years that their management teams and global platforms are very strong.

TWST: It sounds like these guys have a pretty bright future.

Mr. Fox: Our opinion is that they definitely have a bright future. The reason the stocks have pulled back from recent highs is the volatility of expectations for the economic environment.

TWST: You view that, I gather, as a buying opportunity.

Mr. Fox: I think for long-term investors that look out over the next few years, this is going to prove to be a great buying opportunity.

TWST: Thank you. (TJM)

Note: Opinions and recommendations are as of 10/10/07.

MICHAEL FOX JPMorgan 277 Park Avenue New York, NY 10172 (212) 622-6454